Canalys research release 2004/111

3G handsets on the rise – Imaging phones dominate EMEA shipments, WiFi handsets to emerge in 2005

Reading, UK – 2 December 2004 For immediate release

• Two-thirds of mobile phones shipped in EMEA in Q3 had integrated • leads the phone market with 48% share • handsets represented 3% of all shipments in EMEA in Q3 2004 • LG is the 3G market leader, with 55% share of EMEA handset shipments • WiFi phones will start to make an impact in 2005

EMEA Q3 2004 – highlights from the Canalys research Of the 62 million mobile phone handsets shipped in EMEA in Q3 2004, Canalys estimates that just under 40 million, almost two-thirds, were camera phones. 3G handsets represented 3% of all shipments in the period, and 4.6% of all camera phones. 2004 has seen a dramatic shift towards camera phones, which have captured 56% of the overall market this year. Canalys research indicates that Nokia was the leading camera phone vendor in the quarter, with 48% share, followed by Sony Ericsson on 12% and on 9%. These were narrowly ahead of Motorola and Siemens in fourth and fifth place respectively. In the nascent 3G handset market, however, the picture is quite different, and Canalys warns vendors and operators not to get distracted from the core customer requirements as activity around 3G service launches builds.

“There has been a huge rise in camera phone shipments, but multimedia messaging usage has not exploded in the same way,” said Chris Jones, Canalys director and senior analyst. “Consumers are clearly drawn to the idea of having a convenient, ever-present built into their phone, particularly as the purchase price for many of them has been offset by upgrade subsidies. But that doesn’t necessarily reflect a desire to send photos between phones, particularly if there is a cost attached to each message. What the integrated camera has enabled though is a way of personalising the phone, with unique wallpapers and screensavers, without downloading premium image content. Operators need to keep a close eye on usage trends for signs of service revenue being eroded by behavioural changes prompted by technology advances in the hardware.”

Canalys also advises vendors not to lose sight of the basic mobile phone requirements of the mass market. The inclusion of bigger, brighter screens, higher resolution still and imaging capabilities, integrated flashes and the addition of technologies such as and WiFi, all come with a price attached – more drain on the battery.

“One of the challenges as operators start to push 3G is ensuring that users’ fundamental mobile phone needs are still met, which includes acceptable standby and talk times,” added Canalys research analyst Abdus

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Owadally. “We have already seen reduced battery life in some of the recent 2. camera phones. Customers will quickly become dissatisfied if they find they are unable to make a voice call because their talk time has been compromised by the inclusion of a more sophisticated display. The problem will worsen if customers make greater use of content services like Vodafone Live, video calls and downloaded music and games. If customers perceive that making use of these services is impairing their ability to make and receive phone calls, then they will be deterred from using them.”

With 3G activity only now starting to ramp up in EMEA, it will be a while before the effect of the new services on customer behaviour and customer satisfaction comes to light. Canalys estimates that 1.8 million 3G handsets shipped in EMEA in Q3 2004, up 39% on the preceding quarter, with the “3” network accounting for the vast majority of 3G customers to date. LG led in 3G handset shipments for the second quarter running, with 55% market share. Its success has come from the U8110 and U8120 handsets sold by “3”. Early players in this space, such as NEC and Motorola, have slipped back, but Canalys expects that Motorola will come back strongly with a spate of new 3G handsets shipping in Q4 and aggressive launch plans for 2005. NEC was in second place in Q3, ahead of Nokia in third.

“The 3G handset market is set to become even more competitive with the arrival of newcomers, namely Sharp and Sanyo, on the Vodafone and Orange networks respectively,” Owadally added. Vodafone Live with 3G was recently launched in 12 countries in EMEA, backed by a high-profile marketing campaign. Vodafone has taken a leaf out of Japanese and Korean operators’ books in announcing an extensive range of handsets prior to launch. In response, “3” has bolstered its portfolio ahead of Christmas with six new 3G handsets.

“We expect 3G handset shipments will increase substantially in Q4 and beyond, but it will take a while to win consumers over and operators should not count on rapid uptake of the more advanced services,” said Jones. “Operators may find it hard initially to clearly differentiate their 3G offerings from their 2.5G multimedia services. Technology-aware early adopters who are already heavy multimedia users will appreciate the faster and richer 3G services, but competitive voice tariffs will remain the major factor in attracting most customers.”

Vodafone’s 3G pricing concentrates on offering large bundles of voice minutes at lower tariffs than its 2.5G services. Operators will use this lever to move customers from 2.5G to 3G. “3” has used a similar approach and its recent growth has stemmed from this rather than demand for video calling and advanced services. Canalys notes, however, that as more operators launch 3G services across EMEA this will result in a larger base of video call capable users, helping to increase such service usage for all the networks, as long as the

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interoperability is solid and the coverage broad enough. At launch, Vodafone had an agreement with “3” to enable video calls across their networks.

3G is finally coming to life in EMEA, but in the years since operators paid out vast amounts for the licences a new threat has emerged. Today, according to Canalys research, only a few thousand WiFi handsets ship each quarter in EMEA, but with rapidly increasing adoption of IP telephony in the enterprise, interest in dual-band, GSM/WiFi phones is starting to rise. WiFi is integrated in the new Nokia 9500 Communicator and Motorola MPx smart phones and while this may initially be positioned as a transport for data rather than voice on these phones, Canalys believes that voice-over-IP clients will start to proliferate on a range of WiFi- enabled mobile devices over the next two years.

“WiFi-based handsets will have to improve in terms of voice quality, battery life and design, and prices will have to come down before significant numbers can be achieved,” Jones said in closing. “But convergence is accelerating and services such as Skype are helping to push the message to millions of people that there are several working alternatives to traditional telephony. Our advice to 3G operators is to not focus purely on mobile consumer services and multimedia, but establish clear voice and data propositions for enterprise customers too.”

About Wireless Handsets The shipment estimates discussed in this release come from Wireless Handsets – part of the market-leading portfolio of continuous services developed by Canalys for the world’s premier technology providers. The service monitors trends in the EMEA mobile phone markets, with special emphasis on emerging technologies and products, such as camera phones, 3G and WiFi handsets. Clients receive quarterly market share updates, trends presentations and forecasts, regular reports and direct enquiry access to Canalys analysts. More information is available from the Canalys web site.

About Canalys Canalys specialises in delivering high quality market data, analysis and advice to the world’s leading technology providers. It is recognised as a key supplier of continuous advisory services and confidential custom projects by marketing managers and strategists within blue-chip IT, telecoms and consumer electronics companies. It has unrivalled expertise in European routes to market for all kinds of high technology products and services, and provides worldwide market data and trends analysis.

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